Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 174

Newsletter - Issue 174

This Week in Crypto

The cryptoassets market is performing better ahead of the Merge slated to take place on September 15, you can track its progress here and read more about its implications in our primer. Bitcoin is up by almost 12% over the past week, its TVL has also risen by 13%. Whereas Ethereum jumped by nearly 11%. As shown in the figure below, Solana and Avalanche have also jumped in returns by 18% and 14% respectively, however, their TVL have dipped by almost -2% and -6% respectively. Regarding scalability solutions and DeFi protocols, Optimism saw an 18% increase in performance and Lido, a 12% increase in TVL.

Figure 1: Major Crypto Categories: Price and TVL Developments

Source: 21Shares, Coingecko, DeFi Llama

Key takeaways:

  • Bitcoin mining difficulty increased by almost 10% since August 29
  • ETH official switch to POS is less than 48 hours away
  • Frax joins Aave and Curve in building an all-inclusive DeFi ecosystem
  • Google Cloud to become an Axie Infinity Ronin sidechain validator

Spot and Derivatives Markets

Figure 2: ETH Spot to Futures Volume (30-D MA)

Source: TheBlock, Cryptocompare

The figure above indicates the looming speculation around the Merge, given the declining spot volume against the futures.

On-chain Indicators

Figure 3: Bitcoin Mining Difficulty

Source: Glassnode

Bitcoin mining difficulty increased by almost 10% since August 29, it’s the highest increase the network has seen since May 2022. Although this indicator isn’t exactly directly proportional to the returns on the cryptoasset, a rising Bitcoin mining difficulty shows a healthy network attracting more miners, making the Bitcoin network more secure with computing power.

Macro and Regulations

The US unemployment rate rose to 3.7% in August, which indicates that the job market is normalizing following abnormal macroeconomic factors; repercussions of COVID-19 and Russia’s invasion of Ukraine. Moreover, China agreed to start paying Russia’s Gazprom in rouble and yuan for natural gas transactions. Conversations about proof-of-work mining are heated, as Europe buys as much Russian oil as it could to stock up before the EU ban is in force in December:

  • EU: French lawmakers are fighting against proof-of-work mining, saying that energy shouldn’t be wasted on such practices in times of war. An EU meeting was held in Brussels on Monday and this topic was most likely discussed. Although not much has been reported about the conclusion of this meeting, we believe that if the proof-of-stake mining proved to be secure and democratic, the proof-of-work narrative could have a hard time in this jurisdiction.
  • US: On the back of President Joe Biden’s Executive Order, the White House published a report on crypto mining that recommends disclosing energy consumption and environmental standards to be set by inter-federal agencies such as the Environmental Protection Agency and the Department of Energy. The report could have been more comprehensive if it had mentioned the improvements in mining chips that could boost energy efficiency, and reduce consumption, noise and water waste. Moreover, the report also failed to differentiate between Bitcoin’s proof-of-work mining from Ethereum’s, as the latter runs on an ASIC-resistant network which makes it consume about 200% less energy.
  • In the meantime, Iran is licensing crypto miners within its jurisdiction under a new regulatory framework that allows licensed miners to use their mined crypto to pay for imports. The framework also prioritizes supplying the crypto mining industry with renewable energy. Due to sanctions coupled with political reluctance about crypto mining, Iran accounts for only 0.12% of the global hash rate according to Cambridge Center for Alternative Finance. However, it is worth noting that Iran is the world’s third-largest producer of natural gas, on which most of its energy supply is generated, covering its consumption needs in addition to a surplus that could potentially power a larger hash rate.

In other news, Coinbase is backing a lawsuit by six users against the US Treasury’s sanctions of Tornado Cash, claiming it sets a dangerous precedent that could harm not only the crypto industry but the broader tech industry. This is a big step in the debate around privacy, and how not all private transactions can be categorized as malicious.

Crypto Infrastructure

Figure 4: ETH’s roadmap leading into the merge

Source: @trent_vanepps on Twitter

The Road to the Merge. Ethereum is now the talk of the town as we’re approaching the 11th hour of its distinguished journey transitioning into POS, and unleashing an environmentally sustainable chain in the process. First, ETH developers deployed the 13th final shadow fork testnet merge without any issues, paving the path for the POS switch. The Kiln testnet is expected to shut down this week with Rinkeby and Ropsten to follow as a result. To that end, ETH will execute the switch over two consecutive upgrades. First was the Bellatrix upgrade, bringing the beacon chain into a state ready to merge and giving time for validators to update their clients, which was activated on the 6th. Next would be the Paris upgrade which would see the merging of the consensus layer (beacon chain) along with the execution layer on top of the POW chain. This last stage will mark the official transition of ETH to the POS consensus, which is expected to materialize around ~7:30 AM ET on September 15.

The excitement around the network’s new monetary policy is perceptible as we saw Binance offer 6% APY for ETH staking on the retail side, while crypto-friendly Swiss-based SEBA bank launched its staking service for its institutional clients. On the other hand, one potential risk of the event is that pricing oracles can source data from the wrong chain during the transition, leading to liquidations across the DeFi space. Hodlnaut recognizes this peril which is why they’re considering selling their current deposited positions to limit the downside drawdown to their already distressed assets.

ETH competitors. The merge isn’t impeding other L1 network developments from pushing at full speed. First, BNB announced they will introduce the ZK-rollups architecture to their blockchain by early 2023, with plans to unveil a testnet in November. The upgrade will reduce gas fees and amplify the network’s capacity in processing 5-10K Txs/sec. Near protocol also announced the 2nd stage of their NightShade will commence by Mid-to-late-September, where 200-300 chunk-only producers will be introduced to the network to assemble chunks (small pieces of a block generated via sharding). This will result in further decentralization of the network. Last but not least, Algorand executed its latest upgrade, where it is now hosting state-proofs critical for improving cross-chain communication and augmenting the network’s ability to process up to 6K Tx/sec, up from 1.5K. Finally, Luna classic experienced a whopping 150% increase in its price on the back of implementing the 1.5% cut on every on-chain transaction. The decision by the battered project is designed to reduce the highly inflated circulating supply that ensued from the collapse of UST back in May.

Decentralized Finance

Figure 5: Top 10 DeFi Assets Weekly Performance

Source: Coingecko

Stablecoins. Binance has been taking aggressive steps as of late to consolidate its efforts. Its latest decision involves auto-converting the balances of three major stables (USDC, USDP,TUSD) into its own BUSD, while allowing withdrawals to happen in the desired stable currency. The move, intended to foster deeper liquidity and bring about less slippage with faster order matching, might have contributed to BUSD recently surpassing $20B in market capitalization. In a similar vein, USDT is now natively supported on the Near protocol. Finally, Coinbase proposed that MakerDAO deposit its idle USDC into its prime vault earning 1.5% annual yield to generate additional revenue of $24M for the protocol.
The Convergence.
The biggest story within DeFi was the launch of Frax's money-market platform. The protocol, named Fraxlend, is permissionless lending and borrowing dApp that allows the utilization of any token supported by chainlink's oracle price feeds. The venturing of the original algorithmic stablecoin issuer into the money market space, represents a broader trend within the industry's blue chips to consolidate all their respective economic activities into a single ecosystem to capture the most value. For instance, the additional cash flow generated via lending the stable FRAX currency to other DeFi projects, in conjunction with the protocol's FraxSwap, will be used to buy back more shares of FXS tokens. A move that mirrors MakerDao's strategy of burning its MKR token through its stability fees. Frax is not the first to take such a measure, as we already saw the leading money-market Aave delve into the stablecoin space by introducing GHO. Meanwhile, the pioneering DEX for stables (CRV) unveiled they'll likely be releasing their stablecoin before the end of September. This approach is a crucial development for DeFi projects to start building sustainable business models that rely less on new token emissions and would equip them better to endure long drawdowns on the back of a growing treasury.

NFTs and Metaverse

Figure 6: NFT Trade Volume by Chain

Source: Cryptoslam, TheBlock

Sandbox has been at the lead of the news this past week, bringing the first Singaporean company into its metaverse. Singapore’s largest bank DBS set to acquire land in the gamified metaverse to build new services with its clients. Renault South Korea also announced a partnership with Sandbox to provide its users with an innovative automobile experience in the virtual world. Ford Motors is also venturing into the metaverse with 19 trademark applications; the announcement came a month after FM’s massive staff cuts to reduce company expenditure.

Ronin Network announced that its mother company SkyMavis partnered with Google Cloud to become an Axie Infinity Ronin sidechain validator. After losing $625M on Ronin Bridge to an exploit back in March, this partnership is expected to strengthen security and safeguard the assets under management by monitoring validator uptimes.

Next Week's Calendar

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